(Yicai Global) Aug. 11 -- Following the financial crisis of 2008, the term "structural reform" has often been referred to in official policy statements as an immediate remedy for the world's economic predicaments. However, nearly a decade on, such statements, policy suggestions and so-called implementations have not completely fulfilled what they promised about reforms.

In 2016 G20 (Group of 20) Hangzhou Summit, member countries identified a number of sectors in which enhanced structural reforms should be carried out, and specified how reforms should be assessed in each member country. Now that another G20 summit has come to an end in Hamburg, Germany, it is high time that we look into what has been achieved.

Yicai Research Institute graded each G20 member country's structural reform progress till 2016 by the indicators suggested in Hangzhou Summit, and released 'Structural Reform Assessment Report for G20'.

The report shows that G20 countries, in the light of their overall grades, have been deepening their structural reforms over the past seven years, though their rankings frequently change. Most of them go farther than where they were in 2010. However, there were some exceptions. The countries heavily dependent on overseas markets were faced with lower external demands, and the subsequent less export volumes hindered their economic growth as well as structural reforms to some extent.

The report also reveals that the five top-graded member countries in structural reform assessment are UK (6.8), Germany (6.0), China (6.0), Mexico (5.9), and France (5.8). Among them, the rankings of Mexico, China and Germany point to most drastic changes, compared with where they were in 2010, rising 14, 11 and 10 places, respectively.

Why Do We Need Structural Reforms?

Even though the global economy has started to recover since the financial crisis of 2008, the high unemployment rate and slow-growing residential income in some countries made it difficult for their economy to grow at levels seen before the crisis. Moreover, investment-discouraging attitudes towards the future economy were accompanied by trade protectionist policies and undermined the growth of world trade volume. All these together made G20 countries back down on their reform promises made after the 2008 financial crisis.

Therefore, the 2014 G20 Brisbane Summit launched new guidelines for carrying out structural reforms in such areas as employment, trade, investment and competition to facilitate the sustainable and robust economic growth in member countries. The guidelines were accompanied by an ambitious new goal: achieving 2% higher growth rate among G20 countries than the one predicted by IMF in 2013, which corresponds to an economic growth of USD2 trillion.

Yet, the assessment at the end of 2015 disappointingly indicated that the reforms actually implemented would only fulfill one third of the goals set, urging the leaders to call for more aggressive structural reforms. This led to the enhanced structural reform plan proposed in the 2016 G20 Hangzhou Summit held in China. The plan specified more prioritized areas for structural reforms, and called on each country to conduct the reforms in any of the specified areas, based on their own circumstances, as appropriate to boost the economic growth. The Hangzhou Summit also set up an indicator system by which each country and its reform progress would be assessed. The policy indicators would reflect the government policy implementation while the outcome indicators would monitor how robust, balanced and sustainable the growth could be, with both sets of indicators affected by various factors.

Table 1: G20 Structural Reform Priorities

Source：G20

How to Evaluate the Results of Structural Reforms?

Yicai Research Institute has graded the structural reform progress of each of the 20 member countries by the suggested indicators to offer a comprehensive reform assessment. In order to provide a comparison base between countries and their performances in different years, Yicai Research Institute selected the most widely covered indicators.

Table 2: Prioritized areas for structural reforms and corresponding indicators

Source: Yicai Research Institute

Assessments and Findings

Specific national circumstances are to be taken into account in assessing the level of efforts made by each member state to ensure comparability of scores. The highest score is set at 10 in the grading system, with 60 percent of the indicators would yield scores between 4 to 6, which corresponds to the normal distribution table (see, table 4 and table 5).

Table 3: Quantile P and scores

Source: Yicai Research Institute

Table 4: Indicator weighing

Source: Yicai Research Institute

Table 5: G20 members' scores and rankings in 2016

*Since the European Union is not a state with a single sovereignty, its overall scores are not comparable to those of other countries due to its deficiency of indicators of trade and competition.

Compared with 2010, most countries have made encouraging progress in structural reforms, indicating sustained efforts for reforms globally.

If we categorize the 20 countries into three different tiers according to their scores in reforms (scoring more than 5 points means progressing relatively fast in structural reforms; scoring less than 4 points means moving relatively slow in structural reforms, and the rest falls into the middle tier), we will find that the better-scoring countries are mostly in the European Union and Asia, as well as in North America.

Figure 1: Categorization of G20 members by degree of structural reform advancement in 2016

China ranked No.3 in structural reform scores in 2016, up 11 places from where it was in 2010, with progress second only to Mexico. The countries with decreased scores are mainly those heavily dependent on overseas markets. When they were met with lower external demand, the subsequent less export volume hindered the economic growth and thus the structural reforms.

Seen from each indicator, all countries have made considerable progress in competition-promotion and innovation-encouragement; trade openness is still deepening, but the countries vary hugely concerning its implementation, which means that globalization is still welcomed by most of them. However, the ongoing problem is that investment has not much improved over the past six years, and that the economic growth rates of G20 countries are still below those achieved before the 2008 crisis mainly due to the weak external demand. The increases in labor productivity and the labor force participation rates are slightly insufficient, but we anticipate faster growth in that area in the future, considering that the effects of structural reform take a relatively long time to manifest themselves.

Figure 2: Mean value of index score variation (2010-2016)

Source: Yicai Research Institute

Figure 3: Scores in each indicator for countries in three different levels in 2016

Source: Yicai Research Institute

The score distribution in Figure 3 indicates that countries in the third-tier have made roughly equal comparative effort to promote competition. For those lagging behind in this area, such as the United States that gets satisfactory overall scores, the rising labor costs are largely to blame. As the key factors for encouraging investment and innovation, promoting competition and lowering the access threshold would eventually raise the labor productivity. Even though the inherent access barriers still exist in some areas, as in the banking and automobile industries in Germany, it is still encouraging to see many countries have loosened their restrictions in the service industry. Among them, France is relaxing its control over retailing, with China, India, Indonesia and some other member countries simplifying the administrative approval procedures which substantially facilitate the development of small- and medium-sized enterprises.

Generally, G20 countries have taken a series of measures to create a more open environment for trade and investment. Member states have developed multiple bilateral trade agreements to lower trade barriers between themselves, as in the case of such agreements between China and South Korea and between Canada and South Korea. Trade promotion treaties between the members have also helped reduce the trade costs. However, the general improvement does not necessarily mean there is room for complacency. The fact is members are so polarized in trade performance, with the "high-performers" hardly overlapping the poorer ones. The emerging countries seemingly make less efforts in trade procedure simplification than the developed ones. But the reasons behind the procedure complexity vary from one country to another. In the case of China, the strengthening of the customs inspections is related to cracking down on illegal actions, such as tax evasion and false trading, to facilitate fair trade and further opening-up.

Normally, "high-performer" countries score high in all indicators, but with some exceptions. Among the three-level countries, those who score higher overall tend to score lower in improving infrastructure. This can largely be attributed to differences between member states' existing infrastructure levels. The developed countries are comparably less thirsty for investment in infrastructure construction than their developing counterparts, for the former normally have better infrastructure. Another reason is that those countries that had been carrying out infrastructure construction long before the assessment are now reducing investment in it. China made comprehensive efforts in infrastructure construction since the financial crisis, with an overall investment of more than 40 percent of its GDP. But as the social liability rate mounts, its investment growth rate has been falling since 2015. In the face of less investment in the public sectors, China's government is encouraging the private sector to invest in the public projects, a practice also adopted later by Australia, Brazil, India, Indonesia and some other countries.

The most prioritized areas in the G20 structural reform field are labor force participation rate and labor productivity aimed at improving the quantity and quality of employment. But raising these two outcome indicators requires far more than easy and once-and-for-all approach. It is a challenging task to cut down the unemployment rate and lift the labor force participation rate among the female, youth and elderly populations. Competency-enhancement reforms among these populations, though time-consuming, are crucial to the long-term and steady economic development.

Even so, we have seen some welcome progress, including the weakened dual segmentation of the labor market, higher education attainment of the labor force, and more tax cut for the low-income population. Particularly, many countries including Japan, South Korea, Australia, France, and South Africa have been working on improving the youth and low-skilled labor force participation rate. Although some countries are still struggling with economic recession, the growth rates of labor productivity in all G20 countries are higher than what the long-term trends indicate. And since this trend has also momentum, it assures them of subsequent progress in structural reforms.

Finally, the stable society and sustainable economic growth necessitate reduced income distribution inequality and inclusive economic growth. But achieving that requires more policy-making wisdom than before. The advancement of science and technology in the past 20 years has not yielded fairer income growth. Technicians, knowledgeable talents and senior officers in enterprises are accumulating their wealth at a much faster pace than the low-income groups. Thus, it remains a key question for policy makers to find answers to how to guarantee the wealth generated by technological advancement is shared among all members of a society in a relatively fair way without hindering scientific innovation. This question will surely challenge structural reformers for some time to come.